September 22, 2010

Highlights

What’re The Project’s Goals?

Will It Be Effective?

Aadhaar: The Unique Identity Project

SEPTEMBER 22, 2010

Aadhaar: Enumerating India

The „Aadhaar‟ Of A UID Number

Unique Identification Number (UID Number) is a government project which aims to directly address the flaws in Indian social infra-

structure at its inception. The project is being headed by Nandan Nilekani, co-founder and former CEO of Infosys Technologies.

‗Aadhaar‘ has become the new name of ‗UID‘. If you are citizen of India then you need a 16 digit unique identification number . This

number will be issued not just to citizens but to all residents of India.

A special India report named ‗What's in a number?‘ by CLSA, released in May 2010, says:

The inability of many Indians to prove their identity has contributed to the wastage of social subsidies and diversion of funds to

the black market, while creating a “poverty premium” for the poor. Over the next five years, the Unique Identification Authority

of India (UIDAI) will issue numbers to 600 million Indians. This massive undertaking should help reduce some of these inefficien-

cies and inequities, while also creating a $12-15 billion commercial opportunity for consulting, IT hardware and services. This

could increase to as much as $20 billion with the long tail impact on banks and telcos.

The report points out to some glaring facts. A country of over a billion people has:

i. Only around 35 million citizens paying income tax

ii. 70 million holders of the Permanent Account Number cards (to pay taxes)

iii. 60 million passports

iv. 240 million unique bank account holders

The report goes on to state that:

“We estimate the poor pay $10-12 billion in usurious interest each year as over 500 million adults are excluded from formal

banking. Meanwhile, over 40% of the government’s $250 billion in subsidy and social spending in select schemes planned over

the next five years is likely to be siphoned off, mostly by “ghosts” and undeserving recipients. This comes on top of leakages and

losses in public distribution systems, and the old-age pension, Mahatma Gandhi National Rural Employment Guarantee and vari-

ous healthcare schemes. A robust identity database can drive better service delivery, inclusion across society, compliance and

tracking.”

A term mentioned in the report is ‗poverty pre-

mium‟ -- a premium paid by the poor to access

basic rights and services. It can range anywhere

from 10-50% of the nominal cost of the goods or

service, says the report. What they mean is that a

poor person has to pay as much bribe as any

other person to get his/her work done because

he/she does not possess any identification docu-

ment.

The poor also end up paying a much higher rate

of interest as they borrow from money lenders

and are deprived of basic banking facilities due

to lack of documents.

The poverty premium borne by those who bor-

row from moneylenders is estimated at nearly

$10 billion per year in 2010, and this is set to

rise to $12 billion annually by 2015.

Ironically, the government is spending on social services and obligations but venal politicians, corrupt officials and other unscrupulous

elements skim off large chunks from the entitlements. Illiteracy — as also caste, religion and gender barriers — compound problems.

SEPTEMBER 22, 2010

NREGS, which was generally accepted as a resounding success, has also been subject to substantial ―leakages‖, according to econo-

mist Surjit Bhalla. ―NREGA is as much of a dud as predicted by Rajiv Gandhi,‖ Bhalla says. His analysis showed that under NREGA

wages received by the poor totaled just `12.7 billion in FY07, as against `58.4 billion actually spent on wages. This reminds all of us of

the time when Rajiv Gandhi had said that “only 15% of intended benefits reach the targeted recipients”.

What Does The UID Project Expect To Achieve

According to the Department of Information Technology:

The Unique Identity Project seeks to assign a Unique Identity (UID) number to each individual in the country that will remain a perma-

nent identifier right from the individual‘s birth to death. It offers many benefits:

i. It would obviate the need to produce multiple documentary proofs of identity for availing any government or private service such

as opening of bank accounts. This will end needless harassment that people face while availing of basic facilities like issuance of

passports, driving licences, electoral identity cards and others. ii. Backed by intensive use of technology, it would greatly facilitate easy verification of a person‘s identity and enable a single com-

munication to trigger address changes in all relevant agency records. iii. It would also serve as the basis for many e-governance initiatives incorporating online verification of a person‘s identity. UID will

enable the government to ensure that benefits under various welfare programmes (such as PDS, Sarva Shiksha Abhiyan and Right

to Education Bill) reach the intended beneficiaries, prevent cornering of benefits by a few people and minimise leakages and

frauds. iv. It will also enable financial institutions to exchange information regarding defaulters and encourage responsible borrower behav-

iour. UIDAI will offer multiple levels of authentication and is in the process of building an economically viable model whereby, depending

on the level of authentication, a fee will be charged from the agency requesting authentication. According to working paper - version

1.1 of UIDAI — they are considering charging banks a transaction fee of `5 for address verification during account opening. Biomet-

rics confirmation will be charged `10 from credit card issuing companies.

While this project aims to be used as a commercial opportunity for corporates as well, there will be major challenges, including con-

cerns about privacy and fraud, risk of political opposition and difficulty in achieving critical mass early enough.

While the idea of a unique identity number that can eliminate ghost beneficiaries is appealing, there are concerns about how effective

this will be in solving the problem of leakages and misidentification. It must be noted that leakages in our system are not limited to ulti-

mate beneficiaries but also intermediaries who eat up a large chunk of the benefits.

Another issue with UID is that it deals with identification of individuals and not households, whereas, most social benefits are distrib-

uted in India on the basis of households. Whether it is food distribution under PDS or LPG distribution, all are distributed on a house-

hold basis. Thus, the challenge that arises now is guaranteeing that UID‘s greatest benefit -- making below poverty line census an inte-

gral component of the proposed Food Security Act – stays foolproof and tamper-proof.

SEPTEMBER 22, 2010

FMCG: Tightening Belts

FMCG Cos In A Spot Over Pricey Commodities: With food inflation crossing 15% and raw material prices at a high, mainly on

supply constraints, consumer product companies are resorting to frantic measures. (The Economic Times, September 20, 2010)

PRU Analysis

Food inflation at 15.10% for the week ended September 4, 2010, was on an uptrend for the straight third week after softening for a

short period in July and in the first half of August. This figure is calculated on a new series based on 2004-05 prices, against the

previous base year of 1993-94, with different weightages allocated to food items. Higher inflation has been mainly caused by rains

disrupting supplies and the new inflation series.

On a YoY basis, cereal prices increased by 7.16%, driven by higher prices of pulses, wheat and rice, while milk prices surged

23.41% during the week.

With increasing food inflation and higher input prices, consumer product companies are adopting measures such as hiking prices,

substituting expensive inputs with cheaper ones and reducing weightage of product packs by holding on to existing price points.

Companies plan to pass on the cost to consumers in some ways. Industry margins have been hit, as it faces pressure from both

sides – rising input costs and competition. Hike in prices may not lead to improved margins, but at least it may leave it neutral. The

companies are in a serious dilemma whether to hike the prices and lose market share or take a hit on profitability.

Britannia chose the latter for Q1 FY11, as its profit fell 30% to `32.8 crore compared to Q1 FY10. It had chosen not to pass on the

increase in cost to consumers. However, now it has indicated that pricing is a dynamic variable for it, without explicitly announc-

ing any immediate increase.

Nestle reduced the grammage of Maggi instant noodles for the first time in two years to 85gm from 90gm and to 170gm from

180gm, without compromising on the popular price points of `5 and 10. It is trying to accelerate cost optimisation initiatives citing

high inflation and higher input prices as ongoing challenges.

Hindustan Unilver (HUL) hiked prices of soap brands Lifebuoy and Rin by 4-6% and stopped a promotional offer on Lux. Godrej

Consumer Products (GCPL) increased the price of its hair colour and may soon do so in soaps too.

Dabur India is mulling over a 2-3% hike across Vatika shampoo and hair oils after two years citing difficulty in managing the com-

modity inflation.

Against such a scenario, RBI hiked the policy rates again to tame inflation and rein in demand.

Telecom: Airtel Redials Handsets

Bharti Enters Mobile Handset Business: In what could give jitters to players like Nokia, Samsung and other such stables, Bharti

on Sunday announced its entry into the fast-growing mobile handset business. (The Economic Times, September 20, 2010)

PRU Analysis

India‘s Number One mobile service provider with a 140 million subscriber base, has announced its entry into the handset space.

One thing‘s for sure: This is bound to make market leaders Nokia and Samsung sit up and take notice. Bharti group firm Beetel

launched eight handsets in the `1,750-7,000 range on Monday and plans to establish its presence throughout India by end FY11.

India is a fast growing market with annual consignments of about 130 million handsets. The market has prominent MNCs such as

Nokia, Samsung, Sony Ericcson and Motorola on one hand, while on the other domestic companies such as Micromax and Kar-

bonn too are significant players.

Beetel aspires to be among the Top Five in the next three years. The market, especially the mass market, is huge, with handsets

priced in the `2,000-6,000 range clocking 30% growth. Hence, Beetel intends to offer feature rich phones at affordable prices.

SEPTEMBER 22, 2010

Beetel phones boast of innovative technology and claim to be pioneers in some categories. Some of the features offered include a

triple SIM (GSM+GSM+CDMA) handset , the first gaming QWERTY phone, first to be able to store a complete movie and a well

designed 3G facility with easy user interface.

Besides, they also have features regular features such as dual SIMs, FM and cameras. It will also offer features appealing to the

youth, ranging from social networking applications, offers for free calls and SMSes, mobile portal and internet browser to mobile

commerce partner.

Beetel plans to employ a business model under which the innovation will be done locally with an in-house design facility, while

manufacturing will be outsourced. Currently it is analysing options such as China to source handsets. But in future it is open to

manufacturing the handsets locally too.

Stock Indices: The Phoenix Rises

Sensex Above 20,000, First Times Since Jan 2008: The BSE sensex rose past 20,000 points early on Tuesday for the first time

since January 2008, boosted by robust foreign portfolio investment. The 50-share NSE index was up 0.5% at 6,007.40. (Reuters, Sep-

tember 21, 2010)

PRU Analysis

The bulls were going strong on the Indian stock

markets until January 2008, when signs of a

pending mortgage crisis slowed down their ar-

dour. Then Lehman Brothers went belly up in

September, sending shockwaves across the

world. This resulted in a sharp slide in global

indices. India was not spared. The BSE-30

dipped from over 20,000 points in December

2007 to below 9,000 in February 2009. Simi-

larly, the S&P C&X nifty 50 index halved from

over 6,000 to below 3,000. The revival in both the indices since March

2009 has been noteworthy. Various stimulus

measures adopted by the Centre played a strong

role in cushioning the fall in demand and the

consequent slide in industrial production.

Riding on strong domestic demand, increased

government spending on infrastructure and,

most importantly, sustained inflows of overseas

funds, domestic indices are close to overshoot-

ing their previous highs. On September 21, 2010,

the Sensex and Nifty crossed the 20,000 and 6,000

marks respectively.

With the revival in the secondary market, the pri-

mary market are also trying to cash in on the

euphoria. With increased investor confidence,

companies returned to the primary markets to raise

funds. During April-August 2010, Indian compa-

nies raised `1,25,687 crore via domestic and over-

seas borrowings. This is 18% higher than the year-

ago levels.

Resources Raised From Primary Market

April-August 2010

` Crore YoY % Growth

Resources raised from primary market

(domestic and overseas) 125,687 18.42

Domestic primary market 120,569 28.81

Through Shares 35,488 3.76

Through Debt Papers 85,081 43.23

Overseas primary market 5,118 -59.17

Source: CMIE

SEPTEMBER 22, 2010

For the week September 20-24, 2010, about 11 companies had lined up their initial public offerings (IPOs) to raise a total of

`3,495 crore. Analysts believe this will be the busiest week in the Indian primary market history after 1995. Even during the red-

hot bull market of 2007, no single week featured 11 IPOs. However, at the supposedly stretched valuations, how much money will

FIIs pump into these issues remains to be seen.

Liquor: Aiming For a New High

United Spirits To Buy Pioneer Distilleries: Spirits major United Spirits has signed an agreement to acquire a majority stake in

Maharashtra-based Pioneer Distilleries for `74 crore. (The Economic Times, September 15, 2010)

PRU Analysis

As part of a bigger plan to reduce its dependence on the market availability of key inputs for Indian made foreign liquor, such as

extra neutral alcohol (ENA), Vijay Mallya-led United Spirits (USL) announced its second acquisition of a distillery (the first being

that of Tern Distilleries of Andhra Pradesh in November 2009 for `13.4

crore).

It has entered into a share-purchase agreement to acquire 54.69% equity

stake in Pioneer Distilleries for `74 crore ($15.88 million). USL an-

nounced the mandatory open offer to shareholders for 20% equity on Sep-

tember 17, 2010, at `101 per share. The offer will open on November 10

and close on November 29, 2010.

Pioneer Distilleries, located in Nanded, Maharashtra, is a 160-kilolitres-

per-day (klpd) facility. This includes a 100 klpd plant using molasses as

input, and another 60 klpd plant under commissioning that uses grains as

input. It also has a 30 klpd absolute alcohol plant and a letter of intent for

bottling of Indian made foreign liquor from grain.

USL, the world‘s second largest spirits maker by volume, aims at increas-

ing its capacity as it prepares to overtake Diageo as the world‘s largest

liquor maker.

USL, growing annually at 12%, registered 100 million cases in volume

sales in FY10. It plans to use its own spirit to be used for 55% of its bot-

tled sales by 2013. This may give it better control over prices of inputs

too. The acquisition will improve the in-house capacity of primary spirit

distillation to 22.5% of USL‘s total requirement and provide further supply side security.

Hence, as part of its strategy to reduce dependence on market and sustain volume growth, USL has earmarked capital expenditure

of `1,100 crore over the next three years. Of this, `700 crore will be spent on primary distillation facilities and malt spirit units.

`400 crore will be utilised to improve back-end infrastructure. USL is interested in buying running concerns as they offer economic

results faster.

Notably, Indian whiskies weathered the recession better than foreign-made whiskies. India dominated the millionaire brand list

globally with six of its whiskey brands – Bagpiper, McDowell No 1, Officer‘s Choice, Original Choice, Royal Stag and Old Tavern

-- figuring in the world‘s Top 10. The other brands in the list are Johnnie Walker, Jack Daniels‘s, Ballentine‘s and Jim Beam.

Silk Exports: Needed, A New Yarn

Silk Exports Fall 10% On Low US Demand: India has missed the target set for silk export earnings in 2009-10 because of fal-

ling shipments to the US, a major importer of Indian silk materials. (Financial Express, September 20, 2010)

SEPTEMBER 22, 2010

PRU Analysis

India‘s silk exports were recorded at `2,871 crore for 2009-10 -- 10% down from 2008-09. In 2008-09, exports touched `3,178

crore.

The textile ministry had set a target of `4,150 crore for 2009-10, but could achieve only 67% of the target. The main reason is the

decline in exports to the US -- from `537 crore in 2008-09 to `417 crore in 2009-10. There was a marginal decline in exports to

other countries as well, including to Hong Kong, the UK and Germany. USA contributes about 15-17% to the total silk exports

from India.

Similarly, in 2008-09 too the textile ministry had failed to achieve

the target `3,970 crore. India exported silk goods worth only `3,178

crore during the period.

Exports to the US have witnessed a down trend continuously for past

three years. According to the Central Silk Board (CSB), there has

been a major decline in exports of natural silk yarn, fabrics and made

up category in 2009-10. In 2009-10, this category fell 23% compared

to the previous year. In contrast, 2008-09 recorded a decline in al-

most all categories.

India exports silk items like natural silk yarn, fabrics, made up,

readymade garments, silk carpet and silk waste. China, the largest

producer of silk, has acquired India‘s major silk exports market by

offering these items cheaper.

When the rupee strengthened against the dollar in 2007, most Indian exporters reduced their shipments as realizations fell. How-

ever, when the rupee began weakening in 2009, making exports commercially viable, Indian companies failed to get orders. India

can look at newer markets like Greece, Turkey and Yemen as they are less exposed to Indian silk exports. The Central Silk Board

can also look at diversifying silk products, extending the traditional use to beat the crisis.

Heavy Engineering: Moving Up The Value Chain

BHEL To Invest `1,200Cr In R&D By 2010: India‘s biggest power equipment maker Bharat Heavy Electricals (BHEL) is re-

vamping its production processes to develop low cost and more efficient equipment as it seeks to counter the threat of cheap imports

from China. (The Economic Times, September 18, 2010)

PRU Analysis

BHEL is the largest supplier of power equipment in India, especially

in the BTG (boiler-turbine-generator) category, which forms a key

part of power plants. It is a fully-integrated player in the domestic

power equipment market. Currently, it offers steam turbines, genera-

tors, boilers up to 800mw ratings, including super critical sets of

660/800mw. BHEL has been able to extend the load on power equipment (to gen-

erate more power) without incurring much additional cost. For in-

stance, it has introduced sets of 600mw rating in the sub-critical cate-

gory that matches with Chinese 660mw super-critical sets in terms of

efficiency without escalating the cost.

In 2009-10, BHEL invested `829 crore in R&D with prime focus on

economical power equipment with high efficiency.

Total Export Earning of Silk items

2008-09 2009-10

Silk Export Earnings `3,178 `2,871

USA (as % of total exports) 17.3 14.75

Country wise Silk Export Earnings

2008-09 2009-10

USA 537 417

Hong Kong 381 366

UK 341 313

Germany 193 158

April-March Figures

SEPTEMBER 22, 2010

The Indian power sector is likely to witness massive capacity additions in the near future.

Of the 80,000mw of BTG orders placed in the 11th five year plan, BHEL‘s market share had been 55%. Of the approximately

62,500mw of BTG orders placed in the 12th five year plan, BHEL has been able to garner 53%. Out of the balance 47%, approxi-

mately half the orders went to Chinese players.

Equipment for about 33% of thermal projects are being imported from China. Thus, import of cheaper power equipment from

China has presented a threat to domestic players, including BHEL.

The company‘s current order book stands at `1,48,000 crore.

The Indian power equipment market is undergoing structural changes, with increasing preference being given to fuel efficient and

low carbon path, super critical technology. BHEL has been taking several initiatives, including strategic alliances through JVs. It

has tied up with Toshiba, GE and Hitachi to set up local manufacturing facilities.

The company is revamping its power equipment manufacturing capacity from the current 15gw to 20gw by the year 2012, which

will lead to economies of scale. The increase in R&D expenditure will definitely help BHEL to focus on fuel efficient, economical

power equipment in future.

Steel: Reviving Fortunes

Steel Prices Are Set To Increase Again Next Month: After a fresh round of price hike early this month, Indian steel makers are

expecting one more round of price rise next month, and this time, by about `500-1,000 per tonne, say industry players. (Financial Ex-

press, September 21, 2010)

PRU Analysis

A sharp rise in cheap imports of flat steel from

China had put downward pressure on domestic

prices in the past four months. However, with

the withdrawal of export rebate by China --

both on hot rolled coil and cold rolled coil --

effective from July 2010, prices had firmed up.

Earlier this month domestic prices were hiked

by `1000-1,500 per tonne.

Globally prices have firmed up in past few

months due to lower steel production and de-

stocking. As per the Steel Business Briefing,

world HRC prices rose by around $100, touch-

ing to $660 per tonne in August 2010 com-

pared to July.

Domestic prices generally follow global

trends. Currently the price of HRC, the base

category indicative of the industry trend, is

`32,000-38,000.

Price rise is mainly triggered by improvement in demand. Construction activity will revive post monsoon and peak during October

2010-March 2011, which will boost demand for long products. Demand for flat products from automobile and consumer durables

industries will also rise during the festive season.

Coking coal and iron ore prices account for 75-80% of the total cost of steel making. The contract price of coking coal for the cur-

rent quarter (July-September) is set around $225 per tonne. Indian and Japanese steel mills reached an agreement with Australian

coal miners to fix the October-December quarterly price contract at $205 per tonne -- marginally lower.

SEPTEMBER 22, 2010

For the current quarter, the price of iron ore in the domestic market as set by NMDC is about `3,315 per tonne. The contract is due

for renewal in October. There could be a drop of around 10% in prices. Thus, a marginal drop in raw material prices and higher

realisation combined with higher expected volumes (due to revival in demand and capacity addition) will help major players im-

prove their margin in the second half of FY11.

Railways: No Easy Rides

Container Train Operators May Hike Fares: Container train operators have informed their customers about an impending hike

in fares, even as they hope to get a respite from the railway ministry in the form of some rollback. (Hindu Business Line, September 21,

2010)

Commodity-wise Freight Revenues By Railways Goes Up 6.83% During April-August 2010: (PIB, September 15, 2010)

PRU Analysis

Freight traffic movement by Indian Railways rose by a moderate 2.3% to 366.7 million tonnes in April-August 2010 on a YoY

basis. This is mainly due to a 16.8% decline in iron ore (excluding for steel plants) as well as a moderate growth in cement and coal

movement. Together, the three commodities accounted for 64.5% of the total rail freight traffic during the current financial year till

August 2010.

Traffic movement in foodgrains and fertiliser was noteworthy, rising by double-digits and reflecting healthy growth in agricultural

activity. Total goods earnings of Indian Railways grew 7.1% to `24,768 crore, compared to the year-ago level. IR‘s freight reve-

nues grew 15.7% to `4,696 crore. The ministry has increased haulage charges for the movement of heavy commodities — cement,

stone other than marble, iron and steel, alloys and metals and petroleum products — by container train operators. Haulage charges

are paid by container train operators to the Indian Railways for using the rail tracks.

The hike varies on the basis of commodity, distance and size of container. The commodity-specific haulage charges are expected to

be valid from October 1 to March 31, 2011. However, container train operators have sent representations to the railways in hope of

a rollback of new rates.

Break-up of Revenue Earning Freight

Traffic (million tonnes)

Apr-Aug

2010

% YoY

growth

Goods traffic on railways 366.7 2.3

Coal traffic on railways 167.5 5.9

For steel plants 17.3 10.6

For thermal power 115.2 5

Pig iron & finished steel traffic 12.5 -1.6

From steel plants 9.7 -2.2

From other points 2.9 0.7

Iron ore (excluding for steel

plants) 29.9 -16.8

Cement traffic 39.2 2.9

Foodgrains traffic 15.8 15.7

Fertiliser traffic 18.9 10.7

POL traffic 17 2.4

Container Service 14.5 -3

Other goods traffic 28.5 2.6

Performance of Indian Railways

April-Aug

2010

April-Aug

2009

% Growth

YoY

units: Rs crore

Total Earnings 37,015.3 34,289.6 7.9%

Total goods

earnings 24,768.2 23,129.1 7.1%

Total passenger

revenue earnings 10592.53 9715.8 9%

units: million numbers

Numbers of

passengers booked 3251.3 3067.1 6%

units: million tonnes

Revenue earning

freight traffic 366.7 358.33 2.3%

Source: Press Info Bureau, DhanBank PRU

SEPTEMBER 22, 2010

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